BPCL:: Meaningful Mozambique: Kotak Sec

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Bharat Petroleum (BPCL)
Energy
Meaningful Mozambique. Anadarko in its recent press release has highlighted the
option of an LNG project to commercialize its gas discoveries in Mozambique. We
believe visibility on the development of BPCL’s E&P discoveries will likely boost
sentiment for the stock which has been subdued due to (1) the recent surge in crude oil
prices and (2) lack of clarity on the subsidy-sharing scheme. We maintain BUY rating on
the stock with a target price of `860 and see potential upside to BPCL’s fair valuation
once the Street starts ascribing value to the E&P portfolio.




LNG project could create meaningful value from Mozambique discoveries
We are encouraged by Anadarko’s recent press release, which highlights the possibility of building
an LNG terminal to realize value from the gas discoveries in Area 1 in the Rovuma Basin in
Mozambique. The resource potential in the block is likely large in order to support an LNG project.
We believe an LNG terminal will generate significant economic value from the recent gas
discoveries. An Anadarko-led consortium with BPCL as a 10% partner has recently announced the
third gas discovery (Lagosta) in Area 1, which has more than 550 feet of net gas pay.

Contiguity with earlier discoveries, if any, could result in significant hydrocarbon reserves
We note that the Lagosta discovery is (1) 16 miles south of the Barquentine discovery having more
than 416 feet of net gas pay and (2) 14 miles southeast of the Windjammer discovery having more
than 555 feet of net gas pay (see Exhibit 1). We believe the resource potential of gas discoveries in
Mozambique could be very significant if contiguity between the three discoveries can be
established. The operator plans to move drillship Belford Dolphin 17.5 miles to the southwest of
Lagosta to drill the Tubarao exploratory well on the block and conduct at least one drillstem
testing (DST) in CY2011E.

BPCL’s E&P portfolio could be meaningful
Exhibit 2 gives details of discoveries in BPCL’s E&P assets. The available data is quite sketchy
currently for us to ascribe value to BPCL’s E&P assets. However, the value of the E&P portfolio
could be meaningful in the context of BPCL’s current market capitalization of US$5.4 bn.
Preliminary estimates put gross resource potential of over 300 mn bbls oil in BM-C-30 block in the
Campos basin in Brazil (BPCL’s stake: 12.5%) and over 10 tcf of gas in Area 1 in the Rovuma basin
in Mozambique (BPCL’s stake: 10%).

Reverse-valuation exercise implies an EV/EBITDA of 6.8X on FY2011E basis
In our reverse-valuation exercise, we subtract the value of investments from the current EV (based
on end-FY2010 net debt) to compute the implied EV of BPCL and divide the resultant figures with
our FY2011E EBITDA estimate. BPCL stock is trading at a reasonable EV/EBITDA multiple of 6.8X.
We use 11X FY2012E EPS (less dividends from associates and subsidiaries valued separately) plus
fair value of investments to arrive at our 12-month fair valuation of `860 for BPCL.